The electricity Default Market Offer (DMO) was introduced on 1 July 2019, after it had become clear that the competitive market was not delivering sufficient benefits to consumers. Many consumers were paying prices well above the best deals available. Others, who had not engaged with the competitive market, were on preset offers with unjustifiably high prices.
The DMO is intended to address both problems. Firstly, it sets an annual maximum amount, or safety net, that an energy retailer can charge consumers who have not engaged, or are unable to participate in the market. Secondly, it serves as a reference price by which consumers can compare competing electricity plans. The DMO’s ‘reasonable’ cost structure includes an allowance for customer acquisitions, and, until recently, included a further allowance to encourage innovation and new competitors.
The DMO is set annually by the Australian Energy Regulator in NSW, South Australia, and south-east Queensland, and a similar mechanism, the Victorian Default Offer (VDO) is set by the Essential Services Commission in Victoria. Other states and regions, where retail competition is less established, have various forms of retail price regulation.
The DMO and VDO have been partly successful. Over the past five years, real prices have been flat in SA and Victoria and have risen by between 12 per cent and 14 per cent in NSW and Queensland. The difference is primarily due to higher wholesale prices in the northern states. More than 90 per cent of consumers in the DMO regions are now on market contracts.
On the other hand, several concerns have emerged around the cost elements of the DMO and the quality of communication between electricity retailers and their customers:
- More than 2.5 million consumers are on contracts with prices above the default offer. Consumers who do not actively maintain engagement with their retailer, through loyalty, limited understanding, or lack of interest, often find they have been transferred from a low-cost offer to the higher priced default offer when the term of the initial contract expires.
- These consumers, and even some on the default offer, could save hundreds of dollars per year by switching to a better deal.
- The safety net tariff includes costs for competitive activity from which disengaged or vulnerable consumers receive little benefit.
The DMO is now being reviewed, with a major focus on a proposal to align it with the VDO and include only costs that an efficient retailer would incur in delivering the service. This proposal should be adopted.
There remains a fundamental tension between ensuring that all consumers are provided with a largely undifferentiated essential service at a fair price, and supporting a market where competition is expected to deliver innovation, investment, and lower prices.
In the supply of many products and services, it is not the role of governments to protect consumers from their own indifference or lack of commercial self-interest. But the way in which retail competition for electricity was introduced, and the nature of the sale and purchase transaction, mean there is a social equity case for government to protect electricity consumers. Action should be taken to address the above shortfalls, even as signs of real innovation around the supply of electricity are finally beginning to emerge.